Bait and Switch? TARP funds turn to CCRP

First Paulson wanted unlimited funds, sorry funds limited to only $700 billion at any one time, to buy troubled assets, then he used the funds to give directly to banks with no meaningful strings attached and now he's saying that the funds will be used in another way entirely.

He wants to use the funds to unlock the consumer credit markets turning the program into CCRP, I suppose.

On the one hand I suppose it is a good thing that he's willing to admit when a program isn't working. On the other hand it makes it look like they really don't have a very good handle on the crisis at all and are just flailing about.

Paulson Shifts Focus of Rescue to Consumer Lending
Nov. 12 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said today in a speech at the Treasury in Washington. ``This is creating a heavy burden on the American people and reducing the number of jobs in our economy.''

Here's another take.

Stocks beaten down by changes in bailout plan
Paulson said the government's $700 billion financial rescue package won't purchase troubled assets from banks after all. He said that plan would have taken too much time, and that the Treasury instead will rely on buying stakes in banks and encouraging them to resume more normal lending.

It looks like the abrupt and unprecedented slow-down in consumer
spending finally made its way into the perception bubble that surrounds
DC.

So, as I read it, Paulson is going to let the troubled mortgage paper be and instead concentrate on buying up bundled credit receivables, namely auto, student and credit card loans.

Does this make sense? Well, since the Fed has picked up $1.2 trillion in "other" assets over the past 6-weeks my guess is that the decision has been made to tag-team the problem by having the Fed buy mortgage paper and focus the Treasury's efforts on the likes of AMEX, GMAC and other "front line" consumer companies.

The problem here is that, once again, Paulson and Bernanke are missing the picture. Somehow they seem to think that the trouble stems from a lack of lenders so they are applying all the trillions to repairing the lenders.

I have not yet found a single quote to lead me to believe they understand that something just as important is missing in action - willing borrowers.

Once the average consumer attends one too many bar-B-ques where people are openly talking about saving and paying down debt, it is over. O.V.E.R.

We are now deep into the psychological territory of a recession, which has nothing to do with the health of the balance sheets of AMEX or GMAC.

It has everything to do with consumer psychology - and consumers are scared right now. This NYT article captures it nicely:

The panic on Wall Street has eased in the last few weeks, and banks have become somewhat more willing to make loans. But in those same few weeks, American households appear to have fallen into their own defensive crouch.

Suddenly, our consumer society is doing a lot less consuming. The numbers are pretty incredible. Sales of new vehicles have dropped 32 percent in the third quarter. Consumer spending appears likely to fall next year for the first time since 1980 and perhaps by the largest amount since 1942.

With Wall Street edging back from the brink, this crisis of consumer confidence has become the No. 1 short-term issue for the economy. Nobody doubts that families need to start saving more than they saved over the last two decades. But if they change their behavior too quickly, it could be very painful.

Unfortunately, instead of helping out families and consumers directly, the vast majority of the big DC programs were, predictably, aimed at the corporate class.

Valuable time was lost, probably eight to ten critical months, and now that the ponderous gaze of the insider bureaucrats has finally swung closer to the true source of the economic slowdown, it is too late.

The consumer has already embarked on a program of saving, paying down debt and all-around thrift.

One too many bar-B-ques has been attended.

In the Crash Course I make the claim that our system requires perpetual expansion or it is threatened with disruption and possibly collapse. The system requires that new credit be manufactured in sufficient quantities or it will be in crisis.

What we are experiencing right now is the impact of not enough new credit and this is why the DC leadership has invested the majority of their efforts into saving the institutions that peddle credit. If they go, then the system goes.

Unfortunately, the 'headwinds' in our story come from 25 years of excessive borrowing and those cannot be eliminated by any combination of TARP, CCRP, or other debt-based government programs.

It is not possible to borrow your way out of a set of problems caused by too much debt and part of the disappointment I feel for practically the entire DC leadership crowd stems from their total inability to grasp this simple fact.

This proves to me that they are really some very clueless losers in the cockpit. They have tweaked the gauges to read green as the engines melt off the wings. Halfway to the alternate airort they decide ugh maybe I'll fly around as the ship burns and look for another field to land in.

The only thing that would fix it is a world wide foregiveness of debt, and a redomination of every currency backed by gold and a plan for sustainable living and alternate energy.

Since that will never happen I think it is safe to say the brown stuff is going to hit the fan.

Funny, (well really sad) is that after it is over if there is some semblance of what we know as normal today, it will just happen once again as only a few will know the cause of the cancer.

Chris, I think you describe core problem - Paulson et. al. simply do not understand, cannot conceive the fundamental roots of the crisis. It has been so long since they had to worry (if they ever did) about their bank balance or access to credit - let alone trying to pay a mortgage and put food on the table - that they are unable to grasp the obvious. A dangerous and scary situation - more so than a knowledgeable conspiracy. The economy where I live (US SW) is largly dependent on growth, urban sprawl, tourism, and real estate speculation. There are some "real" jobs in agriculture, mining, and manufacturing (much of the later defense related), but the rest is based on bubble economics. As the job losses already in the pipeline begin to really bite, the knock-on effects will be hugely magnified. People simply do not have the wherewithall to take on more debt and by the time Obama takes office I expect the situation will look much worse. We are already seeing store closings, dismal auto sales, state budget problems, etc.

While Obama undoubtedly can understand (has the capacity to) the problem because of his background, it is not clear to me that there are enough competent people in the political class that have this capacity. Most are like Bush (not to call him competent) who started a couple of wars and told people to go shopping. Truely clueless! Paulson is doing the same thing, really - same advice. I can't recall how many times I have heard economic pundits declare that if if we can stop the decline in home prices and limit foreclosures everything will get back to "normal". Without a sound basic economy that produces something besides a plethora of secondary services - without real jobs paying a decent wage there will be no recovery...

The Fed has finally woken up and realized that deflation is in full force. Unfortunately (or fortunately), their attempts to spur consumer lending will only fall flat on their face as the number of people/companies worth lending to already have all the credit they need. The only people who need more credit right now are exactly the kind of people who are already overlevereged and unsound to begin with. Hopefully banks will just hoard this money for better times or use it to acquire smaller rivals. Lending it out will only drag out this deflationary spiral longer.

October brought us a new age with the popping of a 25-year credit bubble. The new America values savings, shuns debt. This interim period of pain is going to be tough on those who are incapable of living within their means, those that do will thrive.

Does everyone honestly think that the DC leadership crowd has no clue whatsoever? If they'd been doing the same homework I have, which is not much at all, they would have a clue. So I figure, they MUST know, but there is some other motive for these stupid moves, right? I don't know what, though.

I did not get to watch the whole press conference. Did Paulson mention anything or was questioned by the media about the supposed promised transparency for all this bailout mess? From what I have read online, I didn't see One mention of any reporters asking about what Congress requested him to do. If not, it shows you how controlled our media truly is.

Does everyone honestly think that the DC leadership crowd has no clue whatsoever? If they'd been doing the same homework I have, which is not much at all, they would have a clue. So I figure, they MUST know, but there is some other motive for these stupid moves, right? I don't know what, though.

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Their actions suggest otherwise... hard as it is to believe. Those people dwell in a different universe I think. From what I can figure AIG was bailed out in part because the leveraged foreign debt they propped up was enormous and there was fear of angering powerful forengn investors who are part of the web that finances government debt - but the problems of the real economy and real people exist in another dimension from the world of high finance - how connected they are has not sunk in just yet... IMO

The only thing that would fix it is a world wide foregiveness of debt, and a redomination of every currency backed by gold and a plan for sustainable living and alternate energy.

Since that will never happen I think it is safe to say the brown stuff is going to hit the fan.

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YEP. Been saying this for nearly twelve months I reckon.

IF it doesn't happen, and soon, put your head between your legs and kiss your ass goodbye....

The exponentially growing level of debt is now so mindboggling, that the amount of economic growth necessary to pay for it (and worsen the vicious circle even more!) is IMPOSSIBLE to achieve. We don't even have the resources.

Limits to growth are hard to perceive by people who base everything on growth. It's a bit like a Christian suddenly understanding that Jesus was actually a Muslim all along, and that he got it wrong all his life..... and is now facing going to hell when he/she dies!

Does everyone honestly think that the DC leadership crowd has no clue whatsoever? If they'd been doing the same homework I have, which is not much at all, they would have a clue. So I figure, they MUST know, but there is some other motive for these stupid moves, right? I don't know what, though.

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Their actions suggest otherwise... hard as it is to believe. Those people dwell in a different universe I think.

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Therein lies the problem. They are DEFINITELY insulated from the real world. If you repeat a mantra sufficiently, you will eventually believe your own bullshit.

To the Wall Streeters of this world, a non growth economy is simply impossible, just like we all KNOW the Earth is round and a flat one simply cannot be. Except that these guys actually DO live on a flat Earth and they are just about to discover it is actually round. And FINITE!

Like I keep saying, a debt economy must have economic growth to pay the debt and interest back. Now the debt has reached irrepayable levels, the necessary growth is unachievable on a finite round planet, game over....

Wall St plunges on bailout backflip

Global markets have been rattled by US Treasury
Secretary Henry Paulson's decision to change the terms of the $US700
billion bailout package.

He says using the remainder of the package to buy troubled mortgage
assets as originally planned isn't the most effective use of the money
at the moment and instead it will be funnelled towards boosting the
availability of funds for credit cards, and student and car loans.

And there are growing fears about the health of US consumers, after
electronics retailer Best Buy warned that profits will fall because of
what it calls "seismic" changes in consumer behaviour.

Earlier this week its rival Circuit City filed for bankruptcy
protection, and figures out on Friday are expected to show a 1.9 per
cent fall in retail sales from September to October.

Stocks on Wall Street are down for a third day in a row.

The Dow Jones Industrial Average has lost 4.7 per cent (411 points) to 8,283.

Shares in American Express have fallen more than 10 per cent after
the Wall Street Journal reported it's asking for several billion
dollars in government help.

But shares in General Motors have rebounded, rising 5.5 per cent as
Democratic leaders argue in favour of rescuing the company.

In Europe, markets were also lower, with London's FT 100 dropping 1.5 per cent to 4,182 points.

Oil has continued its slide, falling to its lowest level in 20
months and in futures trading and West Texas crude is at $US55.98 a
barrel.

Spot gold has tumbled to $US711 an ounce.

In local futures trade, the Share Price Index 200 is down 4.6 per cent to 3,801.

The Australian dollar has slumped. Shortly before 8:30am AEDT it was trading at 63.85 US cents.

These people are free-market, exponential growth economists. They cannot accept the idea that the model is flawed. A flawed model implies that they have been, at best, wasting their careers, and, at worst, culpable in creating the conditions for a potentially society-shattering collapse. It simply isn't something that they can conceive of ... sort of like trying to visualize the 10th dimension of string theory or life based on something other than carbon.... it is foreign and unimaginable to them.

I'm guessing that the 'DC crowd' knows full well what is going on, but they are committed to our growth economy and will do anything necessary to prolong that myth, hoping, somehow, that it will turn around somehow.

I used to not think so, but I found these parts of the Big O's speach that indicates he knows - or at least his speach writer knew:

Instead of finding the right level of government oversight in a vibrant free market, we've let the special interests set the agenda. Changes in the financial landscape, driven by technology and globalization, made the 1930’s era Glass-Steagall Act--the New Deal era law that required that investment banking be kept separate from commercial banking--increasingly inefficient. While reform was desirable, the banking, insurance and securities industries spent over $300 million lobbying Congress to shape that reform to meet their own interests. In the two years before Glass-Steagall was repealed in 1999, financial service industries gave $58 million to congressional campaigns; $87 million to political parties; and spent $163 million lobbying Washington. But though the regulatory structure was outdated, the need for oversight was not. Unfortunately, in the rush to repeal the law to create immediate opportunities for certain Wall Street firms, little effort went into modernizing the government's supervision of the financial industry--to guard against the potential for conflicts of interest, to insist on transparency, or to ensure proper oversight of new and complex financial products or the dramatic rise of investment banks and non-bank financial institutions, like hedge funds and Structured Investment Vehicles. Nearly a decade later, our financial markets--and everyday Americans--are paying the price.

As to your comment on prolonging the myth, there also I agree, otherwise why send Leach. Wow, what a name coincidence.

If you want to get a reading of what the bond market has to say about the inflation vs deflation debate I would suggest that you perform the following comparison of spreads: Go to Stockcharts.com and run the daily spreads for $UST2Y:$UST3M then do the same for $UST5Y:$UST3M; $UST10Y:$UST3M; $UST20Y:$UST3M; and $UST30Y:$UST3M. The spreads for these effective Nov 12/08 are: 6.61; 13.17; 20.83; 24.67 and 23.17 respectively. Compare these spreads to the 50 day moving averages for each spread prior to Sept 17/08 (the day that the AIG bailout was announced). These current spreads are approximately 3.4x (times); 5.8x; 7.8x; 8x and 9.3x the spreads that existed prior to the AIG bailout. This tells me that the bond market is requiring significantly greater spreads to hold long term USGov’t money since the AIG bailout. Why? Since all US debt is considered “default risk free” then the only difference must be expectations of inflation over those periods. So since the 2 yr spread has increased by over 300% since Sept 16 the bond market is that much more fearful that the dollars that they will receive from the treasury will have a lower purchasing power than the dollars they invest today. Comments?

I would say that our current system is neo-mercantilist whereby government and corporations transfer wealth from the working class to the rich through collusion and other nefarious means. Mercantilism was the political-economic model that Adam Smith railed against in "Wealth of Nations". He created "capitalism" as a mechanism that would allow those who create the wealth to be the ones that profit from that creation based upon market & political forces he had studied/observed. I still believe capitalism is a best model amongst the other -isms and would hate to mischaracterize our current system with that noble possibility.

Davos, I'm reading my way through this transcript right now and there's a lot to digest in it. I've been contemplating the effects of hyperinflation on my retirement accounts for some time now, and wondering if I shouldn't just pull the money out, pay the taxes and penalty and invest in real estate. Now that I'm reading about the possibility of 401ks being turned into government managed pensions, I'm thinking that is not as crazy an idea as it first seemed to me a month or two ago... This interview isn't going into any detail on practical steps to take to protect one's apparent economic worth, but has this been addressed elsewhere in his writings?

bsm20 said "These people are free-market, exponential growth economists." There is nothing free market about any of this, exponential growth yes but not free market. In a free market all these companies and individuals would have no choice but to file bankruptcy.

I cant advise you. I would see if you can contact that Jason Pierce guy if he is a financial advisor. I'm an ex airline captain who barely made it through high scool. I will tell you that I made a killing 2 times before the real estate market popped, and I as a result had to pay tons in capitol gains.

We did the maximum deleveraging and when our friends were buying commercial real estate and macMansions and fancy cars we ourselves built a home 1/2 the size of our last one (1800 sq ft for a family of 4). and we bought 1999 cars, paid cash, they get good mileage. We also figured we needed to sell our land before it went down or before there were no buyers, despite the cg tax.

I also emptied my 401ks in 2006. We wound up with an unexpected one and we just bailed on it, my other half refused to listen to me until she lost a wheelbarrow of money.

Looking back I have zero regrets. A lot could change depending on how proactive they are, but the new administration is smart. The only way they can destroy there debt it to inflate. It will destroy the peoples debt mortgages to.

Thats just me and what I did, I'm not telling you it is what you should do nor am I advocating you do it. I could be wrong. I just read a lot but that doesn't mean I always get it right.

They have a dynamic yield curve on stockcharts. It looks like the spreads you're looking at are due to decreases in short term yield. The longer term yield, as the 20 year haven't moved much. Might be Fed pushing on the short term rates or flight to "safety" or parking money from the stock market where the holder at least gets back principal, etc.

Article from the BBC in England.

How much does the average chinese manufacturing worker earn in dollar terms?

IN 2004 the Association of Asian Research said

" A recent study shows that the average monthly income of 70% of business
workers in Mainland China is between 800 yuan (US $97) to 2,500 yuan
(US $302)."

If the BBC's analysis is correct on a convergence of the US and China's economy then the deflationary wave that is about to hit the US and the UK is a Tsunami that will wash the vast majority of people's finances ( that is anyone with any debt of any kind) - completely away.

So
how much of the US economy, the home of free enterprise, will end up
being nationalised or bailed out by the state during the current
economic crisis?

So far we've seen banks, mortgage companies, and a mighty insurer
all being propped up and bossed around by the federal government.

And now it's the real economy, manufacturing, that US taxpayers are set to rescue.

Last
night, for example, the Democrat Speaker of the House of
Representatives, Nancy Pelosi, urged Congress to provide emergency
financial help for the crippled US automotive industry.

What's being requested by General Motors, Ford and Chrysler is $50bn
in loans, on top of the $25bn in low-interest borrowing approved by
Congress in September for retooling plants.

As cash-strapped US consumers continue to feel this is not the best
time to buy a car, and are purchasing fewer vehicles than at any time
since the early 1990s, most at risk of collapse is General Motors, the
largest US carmaker.

Pelosi made clear that she felt the big automakers had to be kept
out of bankruptcy at all costs, because of the danger that its failure
would lead to massive damage to suppliers and connected businesses,
with the possible loss of millions of jobs. A recent study by the
Center for Automotive Research concluded that the failure of just one
carmaker would lead to 2.5m job losses.

The scale of what's at stake was captured chillingly in a quote from
a bankruptcy lawyer at White & Case, Alan Gover, who is quoted on
Bloomberg: "Trying to reorganise the auto industry in bankruptcy would
be as close to reorganising the whole US economy as you could get," he
said. "The vast supply chain involves thousands of businesses, millions
of existing jobs and just as many retirees, as well as whole
communities and states".

But here's what some may see as ironic, even - in a dark way - slightly amusing.

The fundamental cause of America's woes (and ours too) is that its
consumers, businesses and government all borrowed too much in the good
years, especially from China.

China's semi-nationalised, heavily state-controlled economy
generated huge financial surpluses through its massive trade in
manufactured goods with America. And those financial surpluses were
recycled back to America in the form of loans, so that US consumers and
businesses could buy even more from China's factories and workshops.

These massive trade and financial imbalances were unsustainable -
and are now being brought closer to equilibrium in a painful way.

Because US financial institutions both borrowed and lent too much,
and because many other mighty companies took on far too much debt, they
have been facing collapse. And where they are perceived as too big too
fail (where the collateral damage were they to fall over would be
devastating), the US government is stepping in with financial succour
from taxpayers.

For years the great trend in the world was the embracement of free enterprise in China.

But now, in America's darkest hour for generations, the US is
embracing a form of state-control and intervention that looks
remarkably Chinese.

So, GE gets $139 billion worth of FDIC protection, the day after Amex becomes a bank to pick up its share of plunder. During the presidential interregnum, the boodling and logrolling has spiraled completely out of control. Nobody's minding the store, and the corporate looters are stripping the shelves bare.

Never mind that it ain't working -- this is the retest of S&P 850. Right here, right now.

This gleeful, hooliganistic looting spree just toasts my ass. I would like to barbeque me some plutocrats on a slow spit, as ah sang this song:

For Deflation/Inflation and the US destruction of its debt (how I truly believe they are going to get all their crud off all their balance sheets) watch Part 2 from the beginning on, I am still finishing it, making notes and fact checking, but so far I'd bet my last buck on this!

The changes in this plan were planned well in advance of its being written. Once the central boys got their bonus', it was on to taking care of the others and throwing some smaller bones around as a way to make the deals look 'fair'. Ford and GM are major manufacturing organizations, and they stand as national icons. They will do well at our expense, and we will allow it. Why? Because we allowed our system to bamboozle us into allowing this monster to be created.

Overall, none of us here should find any of this surprising, but nonetheless angering. The failure of the press to report on the blatant refusal of the Treasury to show where/when/how this money is flowing, besides not even asking about it, speaks to a level of collusion we may never uncover.

The real potential here for multi-national monetary structures to abound, all controlled by purely banking interests, coupled with outrageous increases in government controls and regulations is not just possible, but happening. If one uses all the information offered on this site, it should be quite clear that what is happening today has been in the planning stages for decades - if not longer.

The potential for both a dictatorship-like structure is looming on the horizon for the US. But, given the propensity towards violence in this country, and the availability of arms that other nations don't have, civil unrest and mass carnage would almost certainly be the result - then again, this could all be planned on as well.

Thanks Davos, i'm off to listen to the second interview right now. Are you meaning that you not only took your 401k out of stocks and bonds, but you withdrew the money entirely from the vehicle? Is gold what people buy when they do that? It's so inflated (seeming) right now and difficult to buy, I'm quite intimidated by that move....

I'm at a loss, in part because I'm only a month or two into this whole new understanding of the world's economy, but also because we've intuitively been downsizing and simplifying our lives ever since we had kids 10 years ago. The advice I've read is to crank down on spending and pay down debt fast. But we have no debt, aside from our mortgage, which is half the size it was in California (we were lucky to sell a year ago and move to somewhere cheaper.) So that's $70k at a fixed 6 percent. And we have cars that are ancient by most people's standards, 95-2000, but still run fine. And we have $22k in savings, but I'm thinking I should spend that on durable goods that will make us more self-sufficient (a woodstove, insulated windows and blinds, a chest freezer) before hyper-inflation hits and destroys the value of it. Now I'm wondering if we were stupid to get a smaller mortgage and stay out of debt, as it sounds like debt will be erased through hyper-inflation....

I need to subscribe to the site and start reading through Chris' report. I've been waiting for current events to unfold and, as they have, continue to reinforce his message, but it's clearly time to dive more deeply into this educational process.

To clarify, I sold EVERYTHING, every peice of land (save for the small house we built ourselves) every stock, every 401k and IRA gone penalties paid, taxes paid. Better to have no debt than to lose everything.

If I were in your shoes: pay down everything you can. Hang on to a few bucks to make your mortgage payment. Gold, if (I'd say when) there is hyperinflation will pay nutty prices that you and I could (will) see. A few pieces is a great insurance policy. It is getting harder to get. Buy bullion, know that the feds confiscated it in 1933, know also that Ben's paper (you can find and download it) says he doesn't believe in the gold standard. But he is an id*^t so I'd expect he will be asked to resign and who knows that the G20/7/8 will insist on.

I'd be able to heat by wood (put a metalbestos chimney in they are safe, use a Jotel stove or a soapstone stove), if there is hyperinflation people will freeze is my guess. Generator?

Guns and lots of amo to hunt with. Seeds and a garden. Freezer and a generator. Spend 2-3 grand on food and stuff you will use over the next year. Look poor, dress poor act poor.

I listened to the audio program at Financial Sense. Overall I think it was a good summary of both the inflationist and deflationist arguments. However, what they did not mention in their argument for inflation (unless I missed it) is that in order to have a monetary expansion both lenders and borrowers are needed. The problem at the moment isn't so much a lack of people willing to lend as it is a lack of people willing to borrow.

Mish has published several posts on this over the past few weeks which strongly suggest that consumers are tightening their belts, spending less, and borrowing less. Without willing borrowers, it's impossible for the money supply to expand. With asset prices continuing to fall and less money being borrowed, deflation seems the likeliest outcome in the short term. Inflation will only begin if people start borrowing again.

I'm no expert, so feel free to correct me if I've missed something.

Here's a recent post by Mish on the subject: http://globaleconomicanalysis.blogspot.com/2008/11/industrial-bond-yields-strongly-support.html

That said: I'm listening again (third time now - I'm a little thick) but I believe what he said was if or when there is Quantitative easing (Fed goes to zero interest like in Japan) and the Feds balance sheet will increase ny 50% by YEARS end. Also G3 US ECB and BOJ that balance sheet is over 5.5 trillion. Budget AND trade deficits are bother almost 1 trillion/and over 1 trillion repsectively. Remember that everything big is off balance sheet (war, Katrina bailout etc.)

So they buy more bonds to keep interest low with Quantitative easing. 6 months later (post stimulous) watch out becuase they will "monitize" (counterfiet or as Rudy G would likely say, "print, baby print") their stimulous package(S) and God knows, there will be HUGE stimulous packages. My hunch, Paulson's will look like something that can buy a loaf of bread.

Doing this will DESTROY fixed debt. I guess there is a way to do total foregiveness of debt.

It is scary. The numbers being thrown around are simply crazy and it is our money. Here is my proposal for a bailout plan. Give everybody who has a social security number one or two million dollars to do with as they will. The total cost for that bailout is under a billion. then everybody would have a little cushion as they let everything else survive or fail based on their own merits.

good suggestions on what the Fed should do? I don't think there's any conspiracy theory here... Paulson isn't incented to destroy the financial system and I truly think he's a bright individual. Is he helping out Goldman at the same time? Maybe but is it the driving force behind his agenda? I don't think so... for all those brilliant theorists out there, how about a few suggestions on what they should do? I've seen so many people make calls on what will happen, where the market will go etc.. but when they're wrong, you don't see them coming on the board and saying that they had it wrong... they'll wait until they hope people forget their ill conceived prediciton or they will wait for a lucky moment in time when they seem like they've got it right and then brag about it. Meanwhile for those who predicted a rebound to 9000 on the Dow, I doubt they'll be admitting they were wrong at these levels and then if it does come back up, they'll come on the boards and say what geniuses they were. In the meantime, they might not mention that they would have been off by 800 points before they were right... *sigh*

Anyways, enough of the rant... let's see some good suggestions, document them and then see if they stand the test of time.

Sorry to take so long to reply. I agree that to date the spread increase has been due to the reduction in short term rates as long term rates have not moved much. However the trend here is what I consider important. I believe that we are very close to seeing much larger spreads due to both falling short term rates AND rising long term rates. The falling short term rates are easy to predict as the current deflationary environment will cause the CBs to reduce rates further. The long term rates are more difficult to predict. Take a look at the monthly charts for $UST20Y. The MACD does not support the decreasing price movement (ie: divergence ... since MACD is rising while price is falling as shown by the falling 50MMA and 200MMA). This tells me that we are VERY close to rising long term treasury yields. What could be the fundamental explanation for this? The increased liquidity provided by the world CBs (espacially the Fed) since Aug 07 will lead to inflation in the not too distant future. The Fed has tried to sterilize its liquidity injections as much as possible but recently ran out of Treasuries to sell so it had to get the Treasury Dept to sell new trasuries directly to the public and increase its deposit at the Fed. This will be extremely price inflationary. Just a matter of time. Another fundamental reason for rising future long term treasury rates is that creditor countries will reduce their purchases of long term treasuries at a time when the US has increasing need for debt due to all the bailouts and to pay for the coming fiscal stimulus promised by Obama. The current asset deflationary period should not last too long ... maybe only 2 years or less. General prices will likely follow asset prices with a lag of several months so we should see falling or constant CPI changes for a few months followed by renewed and increased CPI inflation within 2 years. This should be commodity and precious metals bullish.

Paulson Shifts Focus of Rescue to Consumer Lending Nov. 12 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said today in a speech at the Treasury in Washington. ``This is creating a heavy burden on the American people and reducing the number of jobs in our economy.''

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It appears that the offering of easy money is reaching far beyond our imaginations! SOOO...

Here it is folks, the official application for debt relief funding from the FED. Take your time to read through the information, then fill in the blanks with whatever BS crap you you can think of, and take a shot at your piece of the $700mil Bailout!

I suggest everyone go and get as much money as you can, because sooner or later we are all going to be credit delinquent, so we might as well party like the bankers do. Let's have our own summit at Chris's house in a few months. We can call it the CM4 summit or something. We can all bar-b-q with our credit dollars, share gardening secrets and shoot guns into the air celebrating our money. BYOB.

Your original post mentioned a time period starting with the AIG bailout. I only wanted to note that the large spreads were due mostly to falling short term rates and didn't imply much for longer term trends. Certainly, the vast increase in money can make a strong case for future inflation(that's preaching to the CM choir), as the destruction of credit makes a case for deflation(preaching to the Mish choir). This is not an easy decision for me. The jump to a 200 month (16 year) moving average in this rapidly changing environment is too long for me to use with any confidence in protecting myself or my money. Just knowing where I'm headed doesn't keep me on the correct side of a trade or investment given the depth (shallowness?) of my resources and the time frame those resource limits impose. You said 2 years or less, but what gives you confidence in that number? Anyway, two years is an eternity given current volatility.

As an aside, with regard to tech analysis, eg divergence in the MACD technical "study" (avoiding the term "indicator"):

I have found that in most cases you can make divergences appear and disappear depending upon your choice of time frame and period of the study, so I don't give that as much weight. I am using divergence here to mean lower lows in the data series ($UST20Y in this case) and higher lows in the study (MACD), not the current direction of the data series or study movement.

The jump to a 200 month (16 year) moving average in this rapidly changing environment is too long for me to use with any confidence in protecting myself or my money. Just knowing where I'm headed doesn't keep me on the correct side of a trade or investment given the depth (shallowness?) of my resources and the time frame those resource limits impose. You said 2 years or less, but what gives you confidence in that number? Anyway, two years is an eternity given current volatility.

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My focus is on the long term monthly charts precicely for the reason that short term movements are so volatile. I think that anyone who trades in these markets short term will get burned. If you believe as I do that the spreads that I mentioned in my first post above indicate that the long term spreads ($UST20Y:$UST3M) have broken out to the upside then a likely scenario is for the short term rates to continue to fall while long term rates start to increase. The reasons that I have to believe this are lagely fundamental but the technical charts also paint the same picture. For both fundamental and technical reasons I cannot believe that the deflation will be short lived. Two years is likely to be way too short but most people can't fathom that. I actually believe that we will have an extended period of BOTH inflation and defaltion. I call this indeflation (inflation plus deflation and everyone is arguing about which is correct ... thus a play on the word indecision as well). I think that financial assets will continue to delever (so asset price deflation) but essentials like food, energy, precious metals will see price inflation. So how to play this if my analysis is correct? I personally am long precious metals and oil & natural gas. I also hold a significant amount of cash (non-USD as I am Canadian). I plan to short long term treasuries soon using a bear treasury ETF which will also provide a short on the USD at the same time since I plan to break my no margin rule and margin the funds for this purpose in a USD account. I am placing my bets now and will just sit tight and ride it out. I think that I am as well hedged as I can possibly be. If I see some opportunity I may deploy some of my cash but very reluctantly. I think that preserving capital is the key in this environment. In this markets the pigs will truly get slaughtered ... or if you prefer ... the sheeple will get sheared. I am focusing on trying to not get greedy. Survival is my objective.